The Quant Cycle

Interesting Paper!

Hey, just want to shoot out a nice paper:

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3966127

I took some notes:

Bull reversal --> Beaten down stocks rally --> good for all factors.

Bear reversals --> Crashes of growth stocks --> mixed results for value (so be the hell carefull now, even with value, protect your positions with a short!).

Inflation: momentum good, low risk bad + bonds bad, value and quality neutral

"Immediately following a growth rally or value crash we typically observe a strong reversal."

...find that equities and bonds have large negative returns during inflationary periods, but that trend-following strategies generally do well in such an environment. ...and double-digit positive returns for the momentum factor”

(Read the first "Market Wizards” Book and you know what the paper is talking about, the first market Wizards made their money in inflationary times!)

YES, that is what I am seeing as well and my intuition was right.

I tried to pick a bottom in TLT (longer term bonds) and TLT did not work as a hedge, so I got out!

Where are we now?

Yes, growth stocks crash (high beta trash) right now. Growth compounders are weak as well.

The 1-Million-dollar question: Will small cap value momentum (momentum does well in inflationary times) do well while growth stocks crash. So far that has been the case.

But as the paper states, when growth crash, value has mixed results. BUT momentum is doing well in Inflation. So maybe that explains it.

That would mean as long inflation is trending higher, small cap value (neutral in inflation) momentum (good in inflation) should do well.

The thing is inflation likely trending down (a bit!) from here, so I cannot be sure that momentum is doing well while growth tanks.

As soon as long-term bond start to work (e.g., are up on market down days) small cap momentum (also small cap value momentum!) should be in trouble.

https://www.cxoadvisory.com/inflation-rate-forecast/ —>

That is the reason why I stay short 33% the Russell 2000. I simply cannot bet that inflation picks up from here on a rate of change basis.

Out of sample results so far:

Positions:

I am equally weighting the positions, from what I saw the last 12 Months that does not affect performance much and the drawdowns are lower.

Have a look at the fundamentals, there can be found a ton of value in the market (price / cash flows below 10!). But to all value nerds out there, it will not protect as soon inflation ticks down from here…

Long 66% small cap value momentum, Short 33% IWM.

Have a great weekend!